Estimating Returns: Hope for the Best, Plan for the Worst

Between 1926-2020, the US stock market return was basically 10% per year.

While it’d be great to bank on 10% per year, it unfortunately does not work that way. For those that want consistency over the long haul, they will have to accept lower returns (think: CDs, bonds). For those that truly want higher returns over the long haul, they’ll have to accept more volatility (i.e. the stock market, other speculative investments). Either way, you can never fully escape risk.

Interestingly, though, is how infrequent annual US stock market returns actually fall within the long-term 10% average.

If we look at the calendar year returns +/- 2% from the 10% average (so 8% to 12%), this has happened in just five calendar years (1926-2020). So around 5% of all years since 1926 have seen what would be considered “average” returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range. Just 18% of returns have been between 5% to 15% in any given year.

The only way to truly take the randomness out of the stock market is to have a multi-decade time horizon. The best 30 year return was 13.6% per year from 1975-2004. And the worst 30 year return was 8.0% per year from 1929-1958.

 What you can do about it:

It’s impossible to say if the next 30 years will be as kind to investors as the previous 30 were. For those that are still on the journey towards financial independence, it would be best to assume lower returns going forward. Instead of relying on continued 8-10%+ average annual returns (something beyond your control), personal savings and frugality are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

As Morgan Housel, author of the “Psychology of Money” writes, “You can build wealth without a high income, but have no chance of building wealth without a high savings rates, it’s clear which one matters more.”

Lessons from 2020

Lessons from 2020

2020 will be a year we will never forget. From a global pandemic and civil unrest, to an economic downfall that we continue to battle through today, it has been a challenging year that has impacted millions of individuals around the world. For investors, as we reflect on the past year, it’s critical we revisit some lessons learned to better ourselves moving forward. While it’s unlikely we’ll ever experience a year like 2020 again, many of the principles outlined below are timeless, and can serve as foundational reminders that are applicable every year.

 Having an investment philosophy you can stick with is paramount

While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. By adhering to a well-thought out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty. 

Create an investment plan that aligns with your risk tolerance

You want to have a plan in place that gives you peace of mind regardless of the market conditions. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise.

Don’t try and time the market

The 2020 market downturn offers an example of how the cycle of fear and greed can drive an investor’s reactive decisions. Back in March, there was widespread agreement that COVID-19 would have a negative impact on the economy, but to what extent? Who would’ve guessed we would’ve experienced the fastest bear market in history in which it took just 16 trading days for the S&P 500 to close down 20% from a peak only to be followed by the best 50-day rally in history?

Stay disciplined through market highs and lows

Financial downturns are unpleasant for all market participants. When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility.

Focus on what you can control

To have a better investment experience, people should focus on the things they can control. It starts with creating an investment plan based on market principles, informed by financial science, and tailored to your specific needs and goals.

The SECURE Act: What you need to know

The SECURE Act

Written by: Dennis McNamara

Congress just passed a year-end bill known as the SECURE Act (i.e. Setting Every Community Up for Retirement Enhancement Act of 2019). While the name suggests both promise and opportunity in solving our nation’s retirement crisis, we at wHealth Advisors dug into the weeds and wanted to use our last blog post of 2019 to share some thoughts.

Let’s start with the GOOD:

  • Retirement deductions for those over 70.5 years old: For those who have earned income and happen to be over age 70.5, you can now contribute to an IRA.
  • Required minimum distributions bumped back from 70.5 to 72: For those who are not yet 72, required minimum distributions from qualified retirement accounts will now begin at 72 rather than 70.5.
  • Multiple Employer Retirement Plans: Allows two or more unrelated employers to join a pooled employer retirement plan (Dental and Medical practice owners/partners: This is for you!). These plans will need to be administered by a Registered Investment Advisor firm (like wHealth Advisors). If done correctly, this provision can create significant savings for both owners and participating employees.
  • Kiddie tax rates: Unearned income for a child under 18, or under 24 and a full-time student, to now be taxed at the parent’s marginal tax rate (as opposed to the previous trust tax rates which in most cases were higher than the parent’s tax rates).
  • 529 plan expansion of qualified expenses: Allows 529 funds to be used for registered apprenticeships, home/private/religious schooling, and up to $10,000 of qualified student loan repayments.

And now the BAD:

  • No more “stretch IRAs” for inherited retirement accounts: Before the SECURE Act, if you passed away and left a qualified retirement plan to your descendants (think: 401k, IRA, 403b etc.), the beneficiaries could take distributions from the inherited account over their own personal life expectancy (calculated by IRS). For example, suppose a 30 year old inherited an IRA from their parent. That 30 year old was previously able to take annual, piecemeal distributions and “stretch” the distributions from the qualified account until their death. After the SECURE Act, non-spouse inheritors of qualified retirement accounts must now have the funds distributed within 10 years of inheriting (note: this change begins for accounts inherited in 2020).
    • This is extremely detrimental to the average investor. REASON: Forces larger income distributions to beneficiaries even if the income is not needed. This will not only minimize the tax deferral benefits (having to take the money sooner prevents the funds from having a longer time horizon to grow tax free) but will also trigger many investors to be bumped into higher tax brackets. From a behavioral standpoint, forcing distributions over a 10 year period will likely result in more folks squandering inherited retirement accounts (thus giving annuity reps another mouth-watering opportunity to sell annuity products).
  • Employer retirement plans can offer “Lifetime Income Providers”: TRANSLATION – annuity companies and their advisors can now place more of their high-cost annuity products into employer retirement plans. Additionally, and according to the SECURE Act, there is no requirement for a fiduciary to select the least expensive option.

OTHER provisions worth noting:

  • In 2021 the IRS will make slight tweaks to it’s life expectancy tables (which will impact required minimum distributions). A small change but a positive one.
  • Increased tax credit for employers starting a retirement plan and for employers that setup a plan with auto-enrollment (again, a nice perk for the Dental/Medical practice owners!).
  • Penalty-free withdrawal (up to $5k) from retirement plans for individuals in case of birth of a child or adoption.
  • Federal medical expense deduction reduced to 7.5% of AGI (down from 10%).

As is often the case, what legislation gives with one hand it takes with the other. While we’re happy with some of the improvements, the most impactful changes (elimination of stretch IRAs, annuities in 401k plans) make it clear that the real winner of the SECURE Act is the insurance lobby.

For any questions or clarifications please feel free to contact us hello@whealthfa.com.